Rajasree Motors P. Ltd, Cochin vs Assessee

Rajasree Motors Pvt Ltd Vs The Asst Commr of Income Tax 39/3842 Alappat Road Circle 4(1), Kochi Kochi 682 016 ( Appellant) (Respondent)

PAN No. AABCR1072K Assessee By Shri A S Narayanamoorthy Revenue By Shri K K John, Sr DR Date of Hearing 5th May 2015 Date of pronouncement 8th,May 2015

ORDER

PER B.R. BASKARAN, AM:

The appeal filed by the assessee is directed against the order dated 30th

Sept 2014 passed by the ld CIT(A)-II, Kochi and its relates to the AY 2009-10.

2 The assessee is aggrieved by the decision of the ld CIT(A) in confirming

the disallowance of Rs 23,43,598/- made by the AO u/s 40(a)(ia) of the I T Act.

3 We heard the parties and perused the relevant materials on record. The

facts relating to the said disallowance are that the AO noticed that the assessee

has paid a sum of Rs. 23.43 lacs as license fee in respect of two softwares

named MBIL Star Diagnostics and MBIL E-Dealer. The assessee is a dealer of

M/s Mercedes-Benz Car and the above said two softwares have been supplied

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by M/s Mercedes-Benz India P Ltd for non-exclusive use by the assessee.

Since the assessee did not deduct tax at source from the above said payments

u/s 194J of the Act, the AO disallowed the same by invoking provisions of sec.

40(a)(ia) of the Act. The ld CIT(A) also confirmed the order of the AO and

hence, the assessee has filed this appeal before us.

4 The ld AR submitted that the assessee has paid only services charges to

M/s Mercedes-Benz India P Ltd., for using the softwares. He submitted that

the ownership of the software, which was a copyrighted article, vested with M/s

Mercedes-Benz India P Ltd., and it has only granted the right to use the same.

He further submitted that since M/s Mercedes-Benz India P Ltd has not

transferred the rights over the softwares and further the payments were made

only as services charges, the same will not fall under the definition of royalty as

given in Explanation 2 under section 9(1)(vi) of the Act. In this regard the ld

AR invited our attention to Explanation 3 given under section 9(1)(vi) wherein

the expression computer software is defined. The ld AR also invited our

attention to the agreement entered between the assessee and M/s Mercedes-

Benz India P Ltd to substantiate his contentions that the assessee was only

given license to use the software and not the ownership. He further submitted

that the assessee is not entitled to share the software with any other person.

Accordingly, he submitted that the assessee is not liable to deduct tax at

source u/s 194J of the Act from the service charges paid by it. The ld AR

further placed his reliance on the decision of the Hon'ble Delhi High Court in

2 ITA No. 535/Coch/2014

the case of DIT vs Infrasoft Ltd (2013) 96 DTR 0113 (Del) wherein it was held

that the license granted for use or right to use of any copyrighted article will

not amount to transfer of any rights over the same and hence, it cannot be

considered as royalty.

4.1 The ld DR, however submitted that the assessee has made the payment

for use of software and hence it will squarely fall under the definition of royalty

as given under Explanation 2 to sec 9(1)(vi) of the I T Act. The ld DR invited

our attention to Explanation 4 wherein it has clarified that the transfer of all or

any rights always included transfer of all or any right for use or right to use a

computer software. Further, inviting our attention to the agreement entered

between the assessee and M/s Mercedes-Benz India P Ltd, the ld DR submitted

that the assessee has obtained the right to use the above said two softwares

and hence the payment cannot be considered as mere service charges as

contended by Ld A.R. Accordingly he submitted that the payment made by the

assessee is liable for deduction of tax at source u/s 194J of the Act. Further

the agreement between the parties itself clearly states that the applicable tax

should be deducted at source. Accordingly, he submitted that the ld CIT(A) was

justified in confirming the disallowance made u/s 40(a)(ia) of the Act.

5 We have heard rival contentions and carefully perused the record.

Admittedly, the impugned amount paid by the assessee was for use of two

types of software which has been supplied by M/s Mercedes-Benz India P Ltd.

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The terms royalty is defined under Explantion2 given under section 9(1)(vi) of

the act which, inter-alia, includes consideration paid for transfer of all or any

rights including granted of a license in respect of a patent, invention, model,

design, secret formula or process or trade mark or similar property. Under

Explanation 4, a reference is made about computer software and for the sake of

convenience; we extract the Explanation 4 as under:

Explanation 4 - For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a license) irrespective of the medium through which such right is transferred."

A combined reading of definition of "royalty" given in Explanation 2,

Explanation 3 and Explanation 4 would, in our view, show that legislature has

intended to include a computer software under "patent or invention" and hence

further the legislature has clarified the same further by inserting Explanation 3

and Explanation 4. Further the agreement entered between the parties would

show that the assessee is a non-exclusive user without any right to transfer the

same to any other person and the assessee is required to pay rent or charges

for use of the software. Since the right to use the softwares has been

transferred to the assessee under the agreement, we are of the view that the

license fee/service charges paid by the assessee to M/s Mercedes-Benz India P

Ltd would fall under the definition of royalty and hence the assessee is liable to

deduct tax at source.

4 ITA No. 535/Coch/2014 6. The decision in the case of Infrasoft Ltd (supra) has been rendered by the

Hon'ble Delhi High Court in the context of DTAA provisions and in the context

of sec. 9(1)(vi) also, it was held that the payment made for right to us a

copyrighted article was not "royalty". However, the Finance Act 2012 has made

brought in amendments to sec. 9(1)(vi) of the Act with retrospective effect from

1.6.1976.

7. We have noticed that the Explanation 4 referred above was inserted by

the Finance Act, 2012 w.r.e.f 1.6.1976. In the following cases, the co-ordinate

benches of Tribunal has taken the view that the disallowance u/s 40(a)(ia)

should not be made on the basis of subsequent amendment brought into the

Act with retrospective effect.

(a) Sonata Information Technology Ltd Vs. DCIT (2012)(Taxcorp (Intl) 4659)(Mumbai - Trib)

(b) Infotech Enterprises Limited Vs. Addl. CIT (2014)(Taxcorp(Intl) 6945)(ITAT-Hyd)

(c) Channel Guide India Ltd Vs. ACIT (2013)(Taxcorp (Intl) 6702)(Mum- Trib)

8. In the case of Infrasoft Ltd (supra), the Hon'ble Delhi High Court has held

that the price paid for a copyrighted article represents purchase price of an

article and cannot be considered as royalty. Thus, it is seen that the view

taken by the assessee gets support from the decision of Hon'ble Delhi High

Court, referred above, till Explanation 4 was inserted in sec. 9(1)(vi) of the Act

by Finance Act, 2012 w.r.e.f 1.6.1976.

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9. The Cochin bench of Tribunal has dealt with an identical issue in the case

of Kerala Vision Ltd Vs. ACIT (ITA No.794/Coch/2013 dated 06-06-2014)

(2014-TIOL-396). In this case, M/s Kerala Vision Ltd was engaged in the

business of distribution of cable signals. The activity of transmission of signals

by satellite was included in the expression "Process", vide Explanation 6

inserted by Finance Act 2012, w.r.e.f. 1.6.1976 and hence it fell within the

ambit of "royalty". Hence, the assessee was liable to deduct tax at source on

the pay channel charges paid by it. Earlier, the Hon'ble Delhi High Court has

taken the view in the case of Asia Satellite Telecommunications Co. Ltd (332

ITR 340) that the transmission of television signals through satellite

/transponders would not fall in the category of "royalty" as defined under

Explanation 2 to sec. 9(1)(vi) of the Act. Under these set of facts, the co-

ordinate bench noticed that the various benches of Tribunal (referred above)

have held that the assessee cannot be held to be liable to deduct tax at source

on the basis of subsequent amendment brought in with retrospective effect.

Further the Tribunal held as under:-

"7. In the instant case, the view entertained by the assessee that the pay channel charges cannot be considered as royalty is in fact gets support from the decision rendered by Hon'ble Delhi High Court in the case of Asia Satellite Telecommunication Co. Ltd (supra). Though the Explanation 6 to sec. 9(1)(vi) inserted by Finance Act, 2012 is clarificatory in nature, yet in view of the fact that the view entertained by the assessee gets support from the decision of Delhi High Court, referred above, we are of the view that the assessee cannot be held to be liable to deduct tax at source from the Pay Channel Charges. Hence, we are of the view that the assessing officer was not justified in disallowing the claim of pay channel charges by invoking the provisions of sec. 40(a)(ia) of the Act. Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the assessing officer to delete the impugned disallowance."

6 ITA No. 535/Coch/2014 10. In the instant case also, the view entertained by the assessee is

supported by the decision of Hon'ble Delhi High Court in the case of Infrasoft

Ltd (supra). Since the assessee was held to be liable to deduct tax on the basis

of subsequent amendment brought in with retrospective effect, in view of

various decisions referred above, we have to hold that the assessee cannot be

held responsible for violation of TDS provisions on the basis of a subsequent

amendment. Accordingly, we are of the view that the assessing officer was not

justified in disallowing the license fee/service charges paid for use of softwares

by invoking the provisions of sec. 40(a)(ia) of the Act, since the view taken by

the assessee was supported by the decision of Hon'ble Delhi High Court.

Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the

assessing officer to delete the impugned addition.

11. In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open Court on this day of 8th, May 2015.

Sd/- Sd/-

( V DURGA RAO) (B.R. BASKARAN) Judicial Member Accountant Member

Cochin: Dated: 8th, May 2015 Raj*

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Copy to:

1. Appellant - Rajasree Motors P Ltd, 39/3842 Alappaty Road, Kochi 16

2. Respondent - The ACIT, Circle 4(1), Kochi

3. CIT(A)

4. CIT, -Kochi

5. DR

6. Guard File

By order

Assistant Registrar ITAT, COCHIN

8